This page has been archived and commenting is disabled.

Citi: "Asset Markets Are Ill-Prepared For Any Risk-Negative Shock"

Tyler Durden's picture




 

This is a tricky period for asset markets, warns Citi's Steven Englander. Positioning still reflects a risk-on view but the risk-on enthusiasm is in EM, equities and Asia rather than peripheral Europe. Investors are still long risk, despite the geopolitical tensions and Fed Chair Yellen’s modest nod to the risk of faster than expected tightening, Englander cautions, concluding that investors continue to anticipate a soft landing despite all the discussion to the contrary.

 

Via Citi's Steven Englander,

This is a tricky period for asset markets. Positioning still reflects a risk-on view but the risk-on enthusiasm is in EM, equities and Asia rather than peripheral Europe. There has been some buying back of USD against G10 but investors are long Asia Pacific versus USD in its place. Geopolitical developments in Russia/Ukraine and the MidEast are having localized impacts, if that. Investors took note of a somewhat changes Yellen tone, but are treating the Fed as an outer-orbit risk rather than as an asteroid taking dead aim.

The two big risk events are the US CPI and next week’s FOMC. We already saw equities  come off a little today, short and medium term note yields move up, and 10yr Treasury yields fall in line with equities. We suspect that investors will hedge a small part of long risk positions in coming days, but only languidly. They have begun to discount non-press conference meetings as being like the ECB’s non-forecast meetings, unlikely to generate much waves.

Despite the backing up of US two year yields, sideways moves in equities and some strengthening of USD within G10, investors are not really prepared for any sort of fixed income unfriendly event. So we are likely to see modest upside risk-positive response to low inflation or dovish surprises and significant position cutting if expectations of Fed normalizing were brought forward.
 
Consider Figure 1. Below which shows d/d, w/w and MTD currency moves against the USD.  What is surprising, as indicated by the little red arrows, is that all G10 currencies are down versus USD on a MTD basis and generally on a d/d and w/w basis as well. The impression of USD weakness comes because most major EM currencies are stronger, despite geo-political concerns and it is more common for EM to be a high-beta version of G10 than to have the opposite sign.  When we get  high yielders outperforming this way,  we are not in a market afraid of a liquidity squeeze.

Within G10 continental Europe is doing worse than the commodity currencies or UK.

 

The correct interpretation is that investors are still long risk, despite the geopolitical tensions and Fed Chair Yellen’s modest nod to the risk of faster than expected tightening. However they have shifted away from European risk towards even higher beta risk, but risk that is less exposed to economic weakness in the euro zone and fallout from the Russia/Ukraine crisis.

Some of this we can directly measure. Our CitiFX flows show a lot of buying of Asian currencies in recent months, but pace of buying has diminished sharply over the last month.

Figure 2a, 2b: Real money and leveraged have bought a lot of Asian currencies

 

Similarly CitiFX Access shows a that the long Asia position increased sharply in Q2.

 

...and looking the correlation of HFR’s daily macro return index with asset prices the strongest correlation by far remains with equity prices, although there may be some recent hedging of these positions by shorting Treasury notes.
 
Bottom line is that we continue to see investors anticipating a soft landing despite all the discussion to the contrary.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 07/21/2014 - 21:49 | 4986270 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

And with this, let the evening futures levitation begin children.....I see that it has already. A slow upward pump, to ensure that we open with a .30-.40 percent in-the-green at the bell. 

Mon, 07/21/2014 - 21:52 | 4986296 markmotive
markmotive's picture

Liquidity in the bond market is starting to dry up. Gonna be painful when everyone rushes to the exits.

http://www.planbeconomics.com/2014/07/this-is-not-time-to-fight-fed-as-t...

Mon, 07/21/2014 - 21:58 | 4986314 max2205
max2205's picture

Soft landing? But I thought we are in a mature recovery cycle?

 

What do I know

 

....................../´¯/) 

....................,/¯../ 

.................../..../ 

............./´¯/'...'/´¯¯`·¸ 

........../'/.../..../......./¨¯\ 

........('(...´...´.... ¯~/'...') 

.........\.................'...../ 

..........''...\.......... _.·´ 

............\..............( 

..............\.............\...

 

 

Mon, 07/21/2014 - 22:20 | 4986399 buzzsaw99
buzzsaw99's picture

i enjoyed that video

Tue, 07/22/2014 - 08:01 | 4987155 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

The big question is: What happens when everyone rushes for the exit at the same time?

Mon, 07/21/2014 - 22:02 | 4986330 El Hosel
El Hosel's picture

Pump those stocks at a medium pace.

Tue, 07/22/2014 - 06:23 | 4987044 TheRideNeverEnds
TheRideNeverEnds's picture

yup, nearly every tick is an uptick, every month a new all time high.  

 

there is zero indication of any downside risk whatsoever. 

 

seriously, whats the risk?  we maybe touch 1900?  then we explode higher and never again in history trade remotely close to this level again?

 

worst case, say for example if Russia nuked the entire eastern seaboard; we maaaaybe trade down to 1850 for a few minutes before people realize the number of windows that will need to be replaced and buy the shit back up to all time highs again.

 

 

Mon, 07/21/2014 - 21:51 | 4986283 buzzsaw99
buzzsaw99's picture

the biggest fattest ugliest dove in the whole wide world is the fed chairthing. why would levered infestors be afraid of anything?

http://www.youtube.com/watch?v=Wl_Z9Nbk1hA

Mon, 07/21/2014 - 21:52 | 4986288 Backwoods
Backwoods's picture

"Bottom line is that we continue to see investors anticipating a soft landing despite all the discussion to the contrary."

 

Investors always expect a soft landing at the top of a market, just like they expect the bloodletting to continue at the bottom of a market.  Not that we're dealing with a "market" right now...

Mon, 07/21/2014 - 22:00 | 4986320 El Hosel
El Hosel's picture

QE will set you free, for a while... and its been a very big while.

Mon, 07/21/2014 - 22:02 | 4986316 Atomizer
Atomizer's picture

When insane people are done creating a matrix for a failed monetary chart, again the family will die over you’re piss poor decisions.

 

Let’s glue your eyeball to the humanitarian horseshit you spew everyday on the TV. Maybe it’s time to show the Central Bankers children what parental fraud, killing and financial coercion really is all about.

Take this piece to your common core teacher/Central Banking offspring.

->>>The Frayed Angels of Gaza | Write a report childen, we did this during a period of no war activity.

^^^^ Grab a box of tissues ^^^^

Mon, 07/21/2014 - 22:06 | 4986352 smokescreen
smokescreen's picture

I just don't know what to do anymore...this market or whatever you want to call it makes no sense.

Mon, 07/21/2014 - 22:15 | 4986379 El Hosel
El Hosel's picture

Makes plenty of sense, "Look Ma" no hands... The "whatever you call it" is always up because it is rigged to go up. No hands will "meat" the tractor trailer eventually.

Mon, 07/21/2014 - 22:23 | 4986411 NDXTrader
NDXTrader's picture

I suspect "investors" are just counting on the fact that the minute this thing is down 5% the Fed will signal that QE might be ramped up again. As long as the dollar is the reserve currency so that the US can expostulate inflation the will pump. This thing ends when the dollar loses its reserve status or there is rioting in the streets over inflation

Mon, 07/21/2014 - 22:24 | 4986413 NDXTrader
NDXTrader's picture

I suspect "investors" are just counting on the fact that the minute this thing is down 5% the Fed will signal that QE might be ramped up again. As long as the dollar is the reserve currency so that the US can export inflation they will pump. This thing ends when the dollar loses its reserve status or there is rioting in the streets over inflation

Mon, 07/21/2014 - 22:34 | 4986436 smokescreen
smokescreen's picture

It appears to me that this mess could go on awhile longer...we are at what about 19 times foward earnings...it could easily go to 24 or higher...on the s&p...I think the fed and others are scared to death to let it drop notably if they can prevent it. any large drop could cause the whole thing to implode...especially if the derivatives shadow market gets unhinged. we all know japan has been dead for about 20 years or so it is a zombie economy, europe is also dead and china won't admit its dying, the US...well we are screwed also...the risk is huge... the big question...when to flip and short the s&p...any thoughts.

Mon, 07/21/2014 - 22:55 | 4986500 TabakLover
TabakLover's picture

Well, been pretty "shocky" that last week or so.  Guess it's gonna take a 10 mile wide asteroid zeroed in on earth's ass to send stocks down.

Tue, 07/22/2014 - 05:55 | 4987031 jubber
jubber's picture

monster ramp short squeeze across everything, unreal

Tue, 07/22/2014 - 07:11 | 4987097 smokescreen
smokescreen's picture

the whole thing is unreal...thats the rub.

Tue, 07/22/2014 - 07:30 | 4987122 Comte d'herblay
Comte d'herblay's picture
Citi: "Asset Markets Are Ill-Prepared For Any Risk-Negative Shock"

 

For this, they go to Harvard and get MBAs that cost a quarter million dollars.

We are not a serious country.

Just out of curiosity, WHEN in all of recorded history, has asset markets EVER been prepared for Risk-Negative shock?  

Pardon me if I don't wait.. 

Tue, 07/22/2014 - 08:06 | 4987168 orangegeek
orangegeek's picture

the only soft landing banksters can hope for is when they jump out of the 40th floor window

Do NOT follow this link or you will be banned from the site!